| OPTION EXERCISE PRICE INTERVALS
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| Exercise prices are typically set at 2-1/2
point intervals for securities trading under $25 per share, 5 point
intervals for securities trading above $25 per share and below $200
per share, and 10 point intervals for securities trading above $200.
The exchange listing the option contract may, however, introduce exercise
prices at different intervals in order to provide increased liquidity.
The 2-1/2 point intervals enhance depth and liquidity in lower priced
options by giving investors in those stocks available strick prices
more near-the-money for hedging purposes. |
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| HOW EXERCISE PRICES ARE DETERMINED |
| As option contracts expire, trading is
introduced for a new expiration month, with the initial exercise prices
normally bracketing the current stock price at the time the new expiration
month contracts are introduced. For example, if XYZ stock were trading
at 47-3/8 at the end of January, the option exchange would probably
introduce the XYZ October 45's and 50's for both puts and calls. |
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New Oct Puts and Calls
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45
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XYZ Current Price
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47.375
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New Oct Puts and Calls
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50
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| If the market price of the underlying
security is at or very close to a standard exercise price, say 49-7/8,
the exercise price that is closest to the market price as well as the
two surrounding exercise prices might be selected |
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New Oct Puts and Calls
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45
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XYZ Current Price
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49.875
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New Oct Puts and Calls
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50
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New Oct Puts and Calls
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55
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| INTRODUCTION OF ADDITIONAL EXERCISE
PRICES |
As the price of the underlying security
(or index) changes, the creation of additional series of options may
become necessary. The new series created would reflect the price movements
of the underlying security, and the additional series may be added to
one or more of the expiration months for which options on that security
are already being traded. New series of options are added when those
options would have at least 45 days left before expiration. For example,
if, in March, XYZ traded at 55, XYZ 60's would be added to the existing
XYZ 45's, 50's and 55's already being traded for expiration months at
least 45 days away.
In general, when the underlying security trades at or through an existing
exercise price, a new series is brought out within a couple of days
for each expiration month which has at least 45 days left until expiration. |
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